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Best Buy to downsize brick-and-mortar footprint

Amid weak sales and growing online competition, Best Buy plans to sublease space at its stores to smaller retailers, joining the ranks of big-box giants that are shrinking store sizes.

June 23, 2011|By Shan Li and Roger Vincent, Los Angeles Times
  • Customers play video games at a Best Buy store in New York. The company announced that it would be decreasing the size of its stores by about 20%, and leasing the space to other retailers. It also plans to open more of its smaller Best Buy Mobile stores that focus on smartphones and tablets.
Customers play video games at a Best Buy store in New York. The company announced… (Chris Goodney, Bloomberg )

When it comes to retailing, big is not so beautiful anymore.

Weak sales, online competition and changing consumer habits have big-box chains looking to downsize. Best Buy Co. is the latest merchant shedding space, in an initiative that stands out in both size and scope.

The giant retailer, with 1,300 stores nationwide, is launching plans to wall off parts of its cavernous stores and sublease the space to smaller retailers, such as grocers, beauty supply stores, home furnishing outlets and others.

Best Buy's new stores will aim to be about 36,000 square feet — down from the current average of 45,000 square feet.

"We can reduce our overall square footage while actually increasing our presence," Best Buy Chief Executive Brian Dunn said at the company's annual shareholders meeting this week. "It's an opportunity to capture cost savings and get ourselves 'right size,'" he said.

Best Buy, based near Minneapolis, survived the consumer electronics shakeout that led to the demise of Circuit City and a host of regional competitors. But its prospects are clouded by a shrinking market for DVDs and CDs, along with competition from online rivals such as Amazon.com.

"Big-box has already seen its heyday," said Brad Thomas, a retail analyst with Keyblanc Capital Markets. "Retailers just don't need as much space as they once did. Across the retail industry there is an effort to reduce the size of your stores as retail and purchases increasingly occur online rather than through brick-and-mortar stores."

Sharing space is one strategy, downsizing is another. Staples, Office Depot and Wal-Mart are among retailers looking to build smaller stores in the future, especially in urban areas.

Notable subdividers include Sears, which turned over 15% of its Costa Mesa store to Forever 21, and Paul's TV of La Habra, which has placed seven of its Southland locations inside Living Spaces home furnishing stores.

Best Buy is trumping those efforts with a large-scale downsizing initiative. Fliers distributed by commercial real estate brokers last week show that it hopes to lease out between 4,000 and 15,000 square feet at its 46 stores in Southern California.

Brokers say prospective tenants might include stores such as Trader Joe's or cosmetics chain Sephora. Unlikely new tenants: competitors in the cutthroat home electronics and appliance business. Best Buy's subsidiary Pacific Sales Inc. is already located in some Best Buy stores in the Southland.

Shari Ballard, executive vice president of Best Buy in North America, disclosed broad details of the downsizing plan during the company's analyst day earlier this year. Ballard and other Best Buy executives declined to comment for this report.

The company previously announced plans to open 150 smaller-format Best Buy Mobile stores focused solely on smartphones and tablets, nearly doubling the total to 325. The mobile stores, which average less than 3,000 square feet, have been very successful, Thomas said, and allow Best Buy to focus on highly profitable mobile devices.

Best Buy's mobile store sales jumped 28% in the last quarter, while its overall same-store sales dropped 1.7%.

The moves reflect Best Buy's attempts to adapt to changing consumer trends. Last week, it reported that profit fell 12% in the three months ended May 28, compared with a year earlier.

On Wall Street, Best Buy's shares are down nearly 7% so far this year. Amazon.com, by comparison, is up more than 6%.

"The old joke is that Best Buy is Amazon's showroom," said Scot Ciccarelli, a senior retail analyst with RBC Capital Markets.

Many consumers still prefer to "touch and feel" a product while making up their minds, he said, but go online to actually make a purchase.

Big-box stores are a pre-Internet business model, said M. Eric Johnson, a professor at Dartmouth's Tuck School of Business.

"It was a killer model in the 1980s and 1990s," he said, "a vast selection of inventory under one roof with low prices. Then, Amazon happened."

Best Buy stores tend to be in desirable shopping locations and may attract other businesses, real estate experts said, but sliding another tenant into a big-box store is no small feat.

New stores will require their own restrooms, electrical systems and air-conditioning in addition to floor-to-ceiling walls separating the businesses. Operators of those stores would also want to add the biggest possible signs and take over as much of the sidewalk frontage as Best Buy is willing to give up, real estate brokers said.

Best Buy generally leases its locations, so its landlords also would have to approve building modifications and subleases, which brokers say could be time-consuming.

It took a year to work out the deal carving space from an Old Navy store in Brownsville, Texas, to make room for a Pier 1 imports outlet, said Pasadena real estate consultant Peter Lynch, who worked on the project.

"It sounds great to say that you are going to cut costs by reducing your real estate," Lynch said, "but it's very difficult to execute and it doesn't happen overnight."

shan.li@latimes.com

roger.vincent@latimes.com

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